In most cases, HIP quantifies its indicators and then adjusts the weights of each indicator based on how it drives financial value. Employee satisfaction, for example, drives profitability substantially more than a company's philanthropy. The firm then tallies up an impact score for each company, and companies with the highest scores are weighted higher in the portfolio.
Connecting the Dots
In his book, Herman details the connections between HIP's human impact indicators and profitability. Some correlations are intuitively obvious. For example, the savings from lower energy, materials and water bills drop directly to the bottom line.
But the amount of room for improvement is not so obvious. Research he cites by INSEAD professor Robert Underwood Ayres, for instance, indicates that only 6% of all material inputs are used in the average manufacturing process. The better companies, though, are taking this seriously. He writes that Hewlett-Packard (a top rated HIP company in the Earth category) is "dematerializing" its products with a focus toward providing services. And DuPont now tracks the "shareholder value per product" as a metric of material efficiency.
Although the connections that he reports between other HIP indicators and profitability make sense, they are not on most investors' radars. Herman cites research by JD Power that proves that customer satisfaction propels revenues and profits, and even shareholder value. Other research by Wharton finance professor Alex Edmans shows that the firms in Fortune magazine's annual listing of "Best Companies to Work For" annually outperform those that are not by four percent in the stock market.
The bottom line, says Herman, is that the market is inefficient when it comes to performance-based sustainability.
A former investment banker and veteran financial reporter, Ellie Winninghoff is a writer and consultant. Her work about responsible and impact investing is linked at: DoGoodCapitalist.com. She can be reached at: ellie.winninghoff (at) gmail.com.